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Public Notice CRTC 1997-83

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Public Notice

1. Following a Public Hearing commencing on 17 March 1997 in the National Capital Region, the Commission today announces its decisions respecting the licensing of new video-on-demand (VOD) programming undertakings.

2. In Decisions CRTC 97-283 to 97-287, the Commission has approved five applications for licences to carry on national VOD programming undertakings to provide the services listed below:

French-language VOD

The Partners of Canal Indigo S.E.N.C. (Canal Indigo)

English-language VOD

The Partners of Viewer's Choice Canada (Viewer's Choice)

English- and French-language VOD

Alliance Communications Corporation and Shaw Communications Inc., on behalf of a general partnership (Alliance/Shaw)

Allarcom Pay Television Limited. (Allarcom)

Electronic Digital Delivery Inc. (EDD)

BACKGROUND

3. In Public Notice CRTC 1994-118 (P.N. 1994-118) dated 16 September 1994, the Commission issued an Exemption Order in respect of persons carrying on programming undertakings for the purpose of conducting limited field trials or experiments to test and develop the technology for providing a VOD programming service and to determine the technical feasibility of delivering such a service.

4. The Commission characterized the nature of a VOD service as one "...that provides programs, as defined by the [Broadcasting Act], transmitted by means of telecommunications, where individual consumers select specific programs to be received by means of broadcasting receiving apparatus at any time of their choosing."

5. In P.N. 1994-118, the Commission stated that, "...should a party wish to offer a VOD programming service other than on an experimental basis, and where the service would clearly have a bearing on attainment of the cultural objectives of the [Broadcasting Act], it will regulate such a service through licensing."

6. In response to its call for applications for new pay television and specialty services (Public Notice CRTC 1994-59), the Commission received two applications from EDD. The Commission decided that these applications constituted VOD programming proposals rather than pay or specialty proposals. Accordingly, the applications were not considered at the 6 May 1996 public hearing held to consider pay and specialty applications.

7. Given the apparent interest by parties to provide VOD services, the Commission issued Public Notice CRTC 1996-107 dated 31 July 1996 and entitled Call for Applications for a Broadcasting Licence to Carry on a Video-on-demand Programming Undertaking.

8. In response to this call, five applications were received, all of which have been approved as VOD programming undertakings. This new class of licence is separate and apart from the existing class of pay television programming undertakings, although the licensees will be regulated pursuant to the Pay Television Regulations, 1990 (the pay television regulations). The Commission notes that today's licensing action does not preclude consideration of other VOD applications in the future.

NATURE OF VOD

9. The introduction of VOD marks an important new stage in the evolution toward fully interactive broadcasting, where control over what content is received in the home and when it is delivered is effectively placed in the hands of the consumer. VOD will allow consumers to select from a vast array of programming, and to choose when they view it.

10. During the 17 March 1997 public hearing, the applicants described proposals involving various technical configurations and differing technologies. VOD services require three basic elements: a library or source facility such as a video server or servers, an interactive navigation system, and a distribution system that has been upgraded to allow for digital signal transmissions. Beyond that, there are numerous possibilities with respect to the placement of servers within the distribution system, the speed of delivery of programs, and the individual roles of distributors and VOD undertakings in server ownership and in the design of the navigation systems.

11. VOD will require, in most instances, digital distribution systems and a significant amount of bandwidth. Accordingly, it may be some time before the majority of cable distribution systems have completed the technical upgrades to their systems that will be necessary to accommodate VOD services. Nevertheless, the Commission expects that the fact that VOD services are now licensed and prepared to implement their authorities will provide an incentive for distributors to accelerate their upgrades. The availability of VOD will also provide an additional incentive to consumers to purchase digital services. The Commission expects that VOD services will be introduced in a gradual fashion, commencing first in areas where high population densities allow the introduction of VOD on an economically feasible basis. Canada's two largest cable operators, Rogers Communications Inc. and Shaw Communications Inc., have both indicated that conversion of their systems to digital technology will take two to three years. At the same time, in order to make maximum use of this new technology, distributors will be obliged to ensure the penetration of digital set-top decoders in subscribers' homes, in part by marketing digital services, such as the recently-licensed specialty services, VOD services, games and other multimedia services.

12. Since VOD technology is in its infancy and will go through a period of rapid evolution, the Commission considers that it would be inappropriate to conclude at this point that any given technology or system configuration is preferable to any other. It will be necessary for the VOD programming undertakings and distributors to negotiate their respective roles and financial obligations in designing and implementing the type of system and level of sophistication that best suits their needs and business plans.

13. With regard to the scope of the types of programming to be offered by VOD services, the licensees of the new undertakings licensed today generally agree that feature films will occupy the majority of the shelf space on the video servers, and they anticipate that a significant amount of their business will be drawn from the video rental market. Most of the licensees predict that non-feature film titles will comprise less than five per cent of the total offering. Alliance/Shaw, however, intends to provide a significant amount of children's, educational and courseware programming. All applicants see the need for maximum flexibility in designing their program offerings, and therefore requested authorization to exhibit all categories of programming set out in Schedule I of the pay television regulations. The accompanying decisions have accommodated these requests. Indeed, the Commission encourages the licensees to test the consumer demand for all types of programming, especially as the capacity of the video servers increases.

14. Two applicants further requested that they be permitted to offer live events, while the other applicants considered that "live" programming was inconsistent with a server-based library of titles. The Commission reiterates its previously-stated position that individual consumers should be able to select VOD programs "at any time of their choosing". Consequently, the Commission considers that live events fall outside the parameters of VOD. As a result, the exhibition of fee-based live event programming will not be permitted on VOD undertakings, and will remain available only on pay-per-view undertakings for the foreseeable future.

15. Alliance/Shaw proposed to provide advertising material, including infomercials, and therefore requested relief from paragraph 3(2)(d) of the pay television regulations. The Commission is of the view that undertakings governed by the pay television regulations should generally not be permitted to exhibit advertising material. Accordingly, it has denied the request by Alliance/Shaw.

LICENSING FRAMEWORK

Competitive model

16. The business plans of applicants proposing unilingual English-language and bilingual services were predicated on their operating in direct competition with one or more additional VOD undertakings. Canal Indigo, the sole unilingual French-language-applicant, assumed that its service would operate in a monopoly environment.

17. In the past, the Commission's general approach had been to foster the financial viability of pay television and pay-per-view undertakings by granting licences authorizing them to operate as regional monopolies. Today's decisions, however, are consistent with the Commission's policy objective to foster fair competition and an increased reliance on market forces in light of evolutionary changes within the broadcasting environment.

18. The Commission notes that the past two decades have witnessed the appearance of an increasing array of broadcasting services, particularly of pay television and specialty services competing for the attention of viewers. The increase in the number and range of programming services will accelerate with the introduction of digital distribution systems and addressable technology.

19. The Commission's position on competition among French-language programming services has generally been more protective than it has been with respect to English-language services due to the limited size of the Francophone market. In reaching today's decisions, the Commission is satisfied that, where French-language services are concerned, the nature of VOD services does not warrant such services being given special protection, particularly in light of the technical difficulties distributors across the country would face if obliged to offer separate English- and French-language services to their subscribers. The Commission considers that a regulatory regime that allows for dynamic and full competition will ensure that minority English- and French-language groups throughout the country will have access to a service in their language.

20. The Commission recognizes that VOD may also have the potential to siphon subscribers from Canadian pay-per-view services. Such an impact may be inevitable owing to the greater flexibility and control VOD services will afford subscribers. The Commission notes, however, that the three existing Canadian terrestrial pay-per-view licensees have also been awarded licences to operate VOD undertakings. This will allow these licensees to adjust their service offerings and business strategies as the marketplace shifts from one technology to another. As mentioned above, the Commission expects that VOD will be implemented gradually, commencing this fall in Calgary, and expanding into other major markets over several years.

Access

21. In Public Notice CRTC 1996-60, the Commission established its Access Rules for Canadian programming services. Specifically, the Commission determined that a BDU to which the Access Rules apply should generally be required to distribute the services of all licensed specialty and pay television undertakings appropriate for its market, subject to available channel capacity. Since VOD programming undertakings represent a class of undertaking separate from the existing class of pay television programming undertakings, the Access Rules do not require any BDU to distribute VOD services.

22. While most applicants acknowledged that, if licensed, they would not have the benefit of the Access Rules, a number of suggestions were made in the written applications, and during the oral phase of the public hearing, that a distributor who offers a VOD service in which it has an ownership position should be required to provide access to a second, competing VOD service whose ownership is independent of any distribution undertaking.

23. In Public Notice CRTC 1997-84, also issued today, the Commission has announced its proposed new Broadcasting Distribution Regulations. The Commission notes that, for the reasons set out in that notice, it does not intend to include in the access provisions of the new regulations any obligations on BDUs with respect to the provision of access to VOD services. The Commission notes, however, that at the oral hearing, Shaw Communications Inc. indicated its willingness to provide access to a second VOD service where such a service is delivered by its provider to the distributor's head end in a manner and form that is compatible with the distributor's VOD distribution and control system.

24. In light of the capacity required to distribute VOD services, and given that BDUs would not be required to carry such services, the Commission considers that channels used to distribute VOD services should remain part of a BDU's available channel capacity for the purposes of the access provisions contained in the proposed new Broadcasting Distribution Regulations. Accordingly, the definition of "available channel" in the proposed regulations includes any unrestricted channel used to distribute a VOD service.

Contributions to Canadian programming

Exhibition of Canadian programs

25. VOD services will not provide a traditional schedule of programs offered sequentially. Instead, they will provide a "library" of titles from which subscribers may make their selections. Therefore, requirements for Canadian content have been applied, and performance will be measured, in terms of the amount of "shelf space" that is provided on the video servers and thus made available to subscribers.

26. For feature films, VOD undertakings will be regulated in a manner similar to that in which the existing pay-per-view services are regulated. The English-language and bilingual services will be required, by condition of licence, to provide on their video servers, at all times, a minimum ratio of 1:20 Canadian to non-Canadian feature film titles. They shall also provide, by condition of licence, all available new Canadian feature films that are suitable for VOD exhibition and that meet the Pay Television Programming Standards and Practices Code. For non-theatrical titles, a minimum 1:10 ratio of Canadian to non-Canadian product will be required. Alliance/Shaw committed to provide a 1:10 ratio for all titles in its inventory, explaining that it could achieve this higher overall ratio for Canadian titles due to its plans to offer significant amounts of children's and educational programming.

27. The requirements imposed with respect to the distribution of feature films on Canal Indigo's French-language VOD service generally reflect those in existence for Canal Indigo's French-language pay-per-view service; these requirements stipulate that a minimum 1:12 ratio of Canadian to non-Canadian feature films be exhibited, including all available new Canadian feature films that are suitable for VOD exhibition and that meet the Pay Television Standards and Practices Code. It is an additional requirement that the service make available a minimum 1:10 ratio of Canadian to non-Canadian titles overall.

28. As noted above, applicants were of the view that, at least initially, VOD services would be predominantly based on the provision of feature films. In general, however, they considered that, as their services mature and as server capacity increases over time, the market potential of other types of programming will increase. Because of the potential of VOD programming to expand in nature and scope, the Commission may decide to review the levels of Canadian content provided by these VOD undertakings after their first five years of operation.

Expenditures on Canadian programming

29. Consistent with its past practice with respect to DTH PPV services, the Commission has decided to require, by condition of licence, that each VOD licensee contribute a minimum of 5% of the annual gross revenues earned by its VOD programming undertaking to an existing Canadian program production fund administered independently of its undertaking.

30. Furthermore, each VOD licensee is required, by condition of licence, to remit to the rights holders of all Canadian films 100% of revenues earned from the exhibition of these films.

Promotion of Canadian programs

31. The successful introduction of VOD services will be dependent on the availability and design of consumer-friendly navigation systems (also known as menus or interactive program guides). In the Commission's view, these navigation systems have the potential to serve as effective means to promote the availability of Canadian product, and VOD licensees should ensure that this potential is realized. These systems will interface with the navigation systems built into the digital set-top boxes employed by BDUs. During the oral phase of the public hearing, the applicants described in some detail their plans to use the navigation systems to promote and highlight Canadian programs. The Commission expects the VOD licensees to adhere to their commitments to ensure that the treatment given to all Canadian titles in their navigation systems is, at a minimum, equal to that given comparable foreign product.

32. Another effective promotional tool is the barker or preview channel. All applicants committed at the public hearing, and are required, by condition of licence, to ensure that a minimum of 25% of the titles promoted on the barker channels each month are Canadian.

Non-proprietary rights

33. The Canadian Association of Film Distributors and Exporters (CAFDE) submitted an intervention requesting that the Commission require all VOD licensees to purchase non-proprietary exhibition rights for feature films from Canadian distributors. CAFDE argued that such a requirement would be identical to the requirement imposed on DTH PPV services. The Canadian Motion Picture Distributors Association, which represents the major Hollywood studios, opposed the CAFDE proposal.

34. The Commission considers that a requirement for VOD licensees to purchase non-proprietary exhibition rights from Canadian distributors would provide strong support for Canada's film distribution and production industries, which are important contributors to the broadcasting system. Since all five applicants agreed to accept such a requirement, the Commission will require each VOD undertaking, by condition of licence, to purchase non-proprietary exhibition rights, as defined in the individual decisions, for feature films from Canadian distributors.

Exclusivity and preferential rights

35. Consistent with the Government's Convergence Policy Statement and with the Commission's licensing approach for DTH PPV services, VOD undertakings are prohibited, by condition of licence, from acquiring exclusive or preferential rights to any programming exhibited as part of their services.

Logs and records

36. Conventional broadcasters, as well as pay and specialty programming undertakings, are required to submit program logs on a monthly basis. Because VOD services will not schedule their programs, a different reporting regime is required. Consequently, VOD undertakings will be required, by condition of licence, to maintain a data base of all titles on their video servers, including the country of origin, the category of program and the period of time each title was stored on the server and made available to subscribers. This information shall be retained for 12 months and submitted to the Commission upon request.

CONCLUSION

37. In establishing this licensing framework, the Commission is satisfied that VOD services will play an increasingly important role in providing alternative opportunities for Canadians to view Canadian-produced feature films and other programming. The Commission is also convinced that VOD licensees will make significant direct financial contributions to the development of new Canadian programs.